This study presents a market integration analysis from 1999 to 2009 of one of China’s most important agricultural commodities in terms of the country’s agricultural revenue, producer livelihoods, and household diets. The pace of development in China’s hog and pork industries has been rapid, and the government is perhaps more than ever investing in its development. Policy of the central government intends to standardize meat production and processing, through investment in commercial operations, infrastructure development, and price and quantity
measures to ensure producer incentives exist for production. Meanwhile, feeding the nation’s population, controlling the pace of rural-urban migration, and securing sufficient natural resources against increasing environmental limitations remain significant government challenges. Therefore, the timing of this study is apt and it sheds light on one of China’s understudied agricultural commodities.
Unlike previous work, the study uses methods from both spatial and time series econometrics (Geographically Weighted Regression and cointegration models) to evaluate the extent of integration in China’s provincial pork markets. Within a Geographically Weighted Regression (GWR) spatial analysis, the study takes into account how heterogeneous supply and demand characteristics determine provincial pork prices. It identifies heterogeneity in pork prices across provinces, confirming that provinces are endowed with varying supply and demand factors, and demonstrates that provinces are affected differently by national agricultural policy and animal disease. Using provinces chosen from distinct clusters of similar prices, the cointegration analysis finds that province prices are not cointegrated prior to June of 2007, but become cointegrated following June of 2007 through August of 2009. The lack of cointegration for the majority of the time period under study is consistent with the heterogeneity in supply and demand characteristics identified in the GWR results. It is also a reasonable finding given China’s fragmented cold chain infrastructure and spatially uneven development of large-scale hog operations. While the finding of cointegration after 2007 could be attributed to the shock of Porcine Reproductive and Respiratory Syndrome (PRRS) and the economy-wide price spikes (including pork), it may instead reflect development in China’s hog industry. The cointegration findings support the notion of higher market integration as China’s hog industry develops.
64 An important finding of the study is that the integration of China’s pork market is occurring much later than in grains markets. Using cointegration testing, most market integration studies in China have focused on grains and soybeans, and found that markets were beginning to uphold the Law of One Price (LOP) and demonstrate market efficiency long before the price series in this study. For instance, Park et al. (2002) studied rice and maize markets during the period of 1988 to 1995. This time frame includes periods of market liberalization and “retrenchment”, when the government reintroduced price and quantity controls. Their analysis finds that over the period of study, government policy controls become less effective in altering market outcomes, implying the persistence of market emergence due to growth in grain markets, volume of trade, and market participants. A second market emergence study by Huang & Rozelle (2006) finds a high degree of integration in rice, maize, and soybean markets from 1996 to 2000. The results of this study suggest that recent development of China’s pork markets (for the province pairs selected) may be similar to the state of grains markets during the 1990s, where pork markets are liberalized yet growth is periodically interrupted. As was the case from 1988 to 1995 for grains (Park et al., 2002), the pork industry has made significant advances in its development; yet, development across space and over time has been uneven. The GWR confirms that heterogeneity exists in pork prices. In China’s markets, pork prices depend on regional supply and demand characteristics, infrastructure endowments, and the extent of investment in commercial hog operations.
An important implication of the study that should be highlighted is that China’s pork markets can be improved so that they more accurately reflect prices. Currently, it appears that many farmers, particularly smaller operations, do not receive full market information when making marketing and production decisions. These results are consistent with the presence of barriers to market information and arbitrage. For example, regional variation in China’s pork prices is directly linked to the feasibility of arbitrage and price signal transmission. Characteristics of regional production can play a significant role in the accuracy of price signals. Concentrations of backyard production in a province can interrupt the relationship between price signals and production decisions, as producers may have only limited sources of accurate market
information. Producers in provinces with generally larger-scale production may benefit from better market information. In more recent times, it is important to note that higher levels of
65 integration suggest that changes in the pork industry have provided an initial movement to the accurate transmission of information.
The fragmented nature of the industry growth also has implications for China’s government initiatives and producers. The central government currently encourages industrial concentration and has outlined a specific plan for the standardization of pork processing across 19 provinces. As many backyard and professional household hog operations leave production, joint ventures, and domestic and international investment facilitate growth of large-scale commercial breeding and finisher farms. The outcome could result in an industry structure where production units are large in scale, strongly vertically integrated, and geographically concentrated. In light of a processing sector plan that requires standardized production across 19 provinces, China may want to encourage small hog producers to develop cooperatives that both stimulate more standardized production and increase the likelihood these producers will receive more accurate market signals. Other agricultural sectors in China already incorporate farmer economic
cooperation, where products are sold for both domestic consumption and export. Such a program for the smaller producers may further assist smaller farms to integrate into the market.
This study presents an analysis of prices in China’s provincial pork markets. It uniquely applies spatial econometric analysis to a research question traditionally examined using time series methods. The study provides an indication of the state of market integration for selected province pairs, but is limited by a lack of transaction cost data and the monthly nature of the price series. Future research incorporating transaction costs and more frequent price data would allow for a more thorough evaluation of market integration in China’s developing pork market. Further research on pork quality differences and differential production and marketing costs by province and scale of operation may also add insights into the likely advantages of alternative industry structures.
66
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72
APPENDIX
73 Table 19. Geographically Weighted Regression Results by Province, Cont’d (OLS, Normalized)
74 Table 20. Geographically Weighted Regression Results by Province, Cont’d (OLS, Normalized)
75 Table 21. Geographically Weighted Regression Results by Province, Cont’d (OLS, Normalized)
76 Table 22. Pork Price Summary Statistics for Five Regional Clusters, 1999-2009